forecasting

Claire Jones

The Bank of England’s forecasting record, both for inflation and growth, has in recent years been woeful.

But would the Bank have done any better if its officials’ pay depended on the forecasts’ accuracy?

According to a paper out today from the Centre for Economic Policy Research, the answer is yes.

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Robin Harding

Tim Duy says that the the Fed is behind the turning tide of economic data and “remains locked into a forecast that anticipates output growth hovering near potential”.

“In short: In general, the data flow of the last eight weeks is clearly encouraging. To be sure, not every release, like the employment report, is perfect. But enough are perfect that forecasters are quickly reversing the downgrades made just a few months ago during the mid-year slowdown. Will the data suddenly turn on us again? Always possible, always something to watch for, but I don’t think that should be the expected path. Right now, the data suggest the US economy might start firing on more than just a few of its eight cylinders. A little optimism is justified. Don’t expect the Fed to reverse course soon – they have yet to embrace the possibility that the economy is set to grow at something above trend. But a data flow like this cannot be ignored forever. Look for more glimmers of hope creeping into Fedspeak in the weeks ahead.”

I agree with most of Tim’s analysis but I don’t agree that the Fed has an overly negative forecast. The Fed’s forecasts have, if anything, been overly optimistic – but the data have moved in their direction and private forecasters are moving up to meet them. Put it another way: the tide of the data may have turned but the FOMC is quite a long way up the beach. Read more

Simone Baribeau

The St Louis Fed today published a fascinating paper on how FOMC members’ motives may play a role in their inflation forecasting.

The paper found, strangely, that by removing FOMC members’ three highest and lowest inflation predictions, the midpoint of the range of price estimates was more accurate than the midpoint of all FOMC members predictions. Read more